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June 19, 2018

India, Russia weigh rupee-rouble trade for defence deals

Efforts to break the logjam over Russian defence deals because of US
sanctions have zeroed in on a rupee-rouble transfer as the only way out
but both sides are finding it difficult to find banking institutions
through which such payments can be routed.

Financial sanctions
by the US have hit India’s arms trade with Russia hard, with payments
for weapons and equipment worth over $2 billion getting stuck, including
those for critical projects such as the repair of leased nuclear attack
submarine INS Chakra.

Senior officials told ET that after
several rounds of consultations, it has become evident that a
rupee-rouble transfer-–pegged on the exchange rate of an international
currency—is the solution. As of now, India signs defence contracts with
Russia for which payments are made in US dollars.

With US
sanctions making this impossible, contract payments have been frozen
since April. A top official said that a foreign currency-—say the
Singapore dollar-—could be used as the benchmark and contract payments
would be conducted directly.

Breaking logjam ::

However,
the two nations are still struggling to find banks that would run the
risk of facing US sanctions for transferring the money. Sources said
that on the Indian side, the banks being talked to include Vijaya Bank
and Indian Bank.

On the Russian side, its largest banking entity
in India, Sberbank, was involved in talks. However, the Russian bank
has not given any commitment on making the payments. A decision is still
to be taken but the idea is to involve banks with the least exposure to
American sanctions.

Other options that were looked at included
payments to non-sanctioned entities in Russia after its flagship arms
trading company Rosoboronexport came under sanctions by the US Office of
Foreign Assets Control (OFAC).

“This option was decided against
as it would have opened up a lot of legal and audit issues, especially
as defence deals are looked at very closely. No one wanted to take a
chance,” a top official involved in talks to resolve the issue told ET.

US
sanctions ban business ties with entities designated as Specially
Designated Nationals (SDN). After fresh notifications in April named
Rosoboronexport, Indian banks were pressured into freezing all lines of
credit (LoCs) to Russian arms companies, resulting in all deals coming
to a halt.

Payments worth over $100 million were blocked in less
than a month with payments of over $2 billion facing uncertainty. This
includes a payment of over $15 million to Russia that would have been
used to repair the damaged INS Chakra nuclear submarine that met with an
accident in late 2016.

Also impacted are ongoing submarine
repairs besides purchases of missiles and ammunition. The signing of a
$5-billion deal to purchase the S400 air defence system from Russia is
also under a cloud.

The US has imposed sanctions against Russia
for interfering in the 2016 presidential election and its actions in
Crimea, Ukraine and Syria.